Alitalia – Tie upWith Etihad – is this a Good Marriage for Both Carriers?

10. February 2014

The carriers have been holding extensive discussions during the past weeks on a possible investment by the Abu Dhabi based airline to the tune of €300m, which would represent a 40% stake
in the ailing Italian carrier. These hopes were further highlighted by Italy’s Prime Minister, Enrico Letta in his recent visit to Abu Dhabi.

Future partners also in cargo - Etihad and Alitalia

Source: carriers

On the face of it, it would seem that discussions are going well as both carriers last week issued a statement “that the two companies will determine a common strategy that meets the
objectives of both parties in the next 30 days as they seek to move Alitalia to sustained profitability.”

“Sustained Profitability?”
Alitalia could certainly use some help relating to future profitability.
The past years have not been good to the Italians due to continuing massive losses, investors pulling out, labor problems and a market environment which was by no means helpful.
However, a strong tie up with Etihad could finally bring a vital source of liquidity and management know-how which can be invested wisely to strengthen long haul routes.

Alitalia basically caters to one of Europe’s largest passenger and cargo markets but is sitting on a net debt of over €800m and continues to make losses of €700,000 each day.
“The writing is on the wall” and this would seem to be the final solution to save the carrier, which is still seen in Italy as a national asset, from total bankruptcy.
The recent EUR 500 million loan package which was put together in order to keep the carrier in the air until the Etihad deal comes about is seen by some as something like giving a patient a blood
transfusion although the body won’t stop bleeding.
Apparently one of the “discussion conditions” is that AZ manage to cut costs by €300m and reduce the airline’s overall debt by the end September.
A heavy target to meet!

Where does this all leave AZ’s cargo product?
Air France / KLM officially still manages the Italian carrier’s cargo product.
However, their influence in AZ continues to dwindle as they both refused to participate in further investment during the debt restructuring phase. This has resulted in their stake in Alitalia
falling from 25% to a mere 7% at present.

Gabriele Del Torchio, AZ’s CEO, in a recent statement still maintains that “we have a commercial agreement with Air France / KLM which runs until at least 2017 and they remain an absolutely vital
partner.”
All three carriers are currently still members of the Sky Team Alliance.

But can Mr Del Torchio continue with AF/KL once Etihad (EY) becomes a major shareholder?
Probably not!
So, somewhere along the line they’ll have to start rethinking AZ’s cargo product.
Who’s going to manage it – who’s fleet will be the best for transport? - and so on.
Who would then be the best candidate?
AF/KL continue their cost cutting process and the scaling down of their cargo fleets. In this respect, can they give AZ originating cargo the priority it may deserve in the future?
On the other side, Etihad is increasing frequencies, adding new destinations and rapidly enlarging their freighter fleet.
Are they then a better alternative for Alitalia’s cargo product in the future?

The future chemistry and success!
A major question for success will be the future “chemistry” between the Alitalia and Etihad management.
Can the AUH-based management come to terms with the ever recurring strife in the Italian labor market and its effects on the national carrier?
Etihad is in the middle of an expansion phase and has holdings in carriers which are still not showing profits against the investments EY has undertaken as well as firm plans for a major
investment in India’s Jet Airways.
Air Berlin is maybe the best example. Etihad bought 29% for $105m which was said to have been recouped by EY within six months. Since then however, EY has given the carrier a $195m loan
along with a further $184m investment by taking over 70% of the Dusseldorf based carrier’s Frequent Flyer Program.
Does this make sense?
Etihad had insisted on job cuts being forced through at both Air Serbia and Air Berlin and they will surely not be able or want to ignore this problem at Alitalia.

Etihad is a carrier which continues on a successful road to growth and would in essence be a good deal for Alitalia’s management to get the carrier up on its feet again.
However, Alitalia’s top men will have to rethink their present strategy, revitalize their product and pull along 100% with the new major shareholder to get this done.
However, EY’s management made it clear that they’d only invest such a large amount in the Italian carrier providing that they (AZ) can fit well into EY’s network and that AZ brings along with it
a credible plan to return to profit.